Phisix: The Correction Cycle is in Motion

The correction phase of the Phisix has become more evident.

Reversion to the Mean: Convergent Market Breadth and Technical Picture

Technical actions and domestic market internals seem to self-reinforce the ongoing cyclical dynamic.

First of all, a technical indicator suggests of a bearish pattern called the head-and-shoulders[1] where a breach of the 5,125 support could mean a test of the major support level at the 4,800 (or from a technical perspective the Phisix may even fall to 4,700).

While I am not a fan of technical charting, I do use it in the understanding that there are many practitioners of these. This implies that critical break points may lead to self-fulfilling momentum swings, albeit the impact could be on a short-term basis. Technical targets often miss.

Anyway, the principle of charting feeds on the pattern seeking behavior or cognitive biases inherent in people than from the more important scientific understanding of human action.

Second, developments in the market internals seem to chime with current chart dynamics.

When the impeachment trial of former Chief Justice of the Supreme Court concluded last May, I laid down my suspicions over the probable political interventions to prop up the Phisix. That’s because during certain periods last June, the Phisix strikingly defied major developments abroad. Amidst hemorrhaging global markets, the Phisix had a huge intraday swing from big losses to substantial gains.

I wrote[2],

The point is ‘interventions’ will eventually be smoothed out or neutralized by the underlying forces which drives the financial markets.

Such interventions had hardly been a one-time event. A deluge of popular self-congratulations over the supposed political accomplishment and mainstream media halleluiahs rationalized the accompanying euphoria in the Phisix.

Nearly a quarter after, circumstantial evidence appear to validate my hunches

The bullish market breadth as measured by the advance-decline spread peaked last January. This has not been surpassed by the recent rally, which ironically brought the local benchmark to a milestone all-time high.

This only means that the June-July rally had been mostly “concentrated” to major heavy cap issues that had large influence in the fluctuations of the local benchmark.

When the market is broadly sanguine, people are willing to take on more risk, thus, the tendency has been to accelerate trading activities.

That supposedly boisterous (politically based) bullish outlook has not matched with the July record setting high of the Phisix.

The same divergence has been exhibited in the number of daily trades (averaged weekly).

In other words, the record breaking rally last June-July has not improved the risk appetite of the median investor as aggressive trading apparently topped out last March.

Again when the market is generally confident, the increase in trading activities will similarly be manifested on the number of issues traded.

Has there been broad market bullishness here?

Nope. Media and popular blarney was not evident in real action.

The same story can be seen. Another divergence emerged, the total number of issues traded daily (averaged weekly) reveals that bullish market sentiment crested on March. The July landmark of the Phisix has not been reinforced by broad market gains.

From the picture based on the market breadth, the record Phisix in the face of divergences meant that correction became imminent. This is what we are encountering today. It simply shows of the forces of “reversion to the mean[3]” at work where artificial price levels supposedly revert to the average.

Oh, to add, the bear market in the Mining sector, which for me, signified as the proverbial shot across the bow for the imminent correction of the Phisix has partly been confirmed.

Then I wrote[4],

I lean on condition (B) or where the bear market of the mining sector will likely percolate into the general market, due to growing risks of contagion

For the holiday abbreviated week (which will be extended for the coming week), only the service sector has posted positive returns. All other sectors including the Phisix fell.

And in looking at the price actions of the different industries, this year’s biggest gainers; the property (violet), banking and finance (black candle) and holding (teal), including the Commercial Industrial sector (blue) have all exhibited signs of rolling over.

After a major selloff, the mining index (light orange) seems to be probing for a bottom.

Again, it is only the service sector (red), which has been this year’s second laggard after the mines, that has showed some signs of resiliency. But my guess is that the current correction cycle will be broad based.

The abovementioned divergences are in fact signs of distribution—where gains over the market have been narrowing. Again technical actions (chart patterns and broad sector activities) seem to reinforce this cycle. In short, previous divergences appear to be converging through a retrenchment phase.

The interventionists, whoever they maybe, managed to push up the Phisix by less than 5% in two months. Now and in the coming sessions, whatever gains they have accrued will likely be eroded if not entirely expunged.

As I have repeatedly been pointing out, the impact of financial market interventions tend to be short term.

Yet the clear lesson that can be gleaned from the above is that People’s action speaks louder than verbal “feel-good” but senseless utterance.

In the theory of human action this is called demonstrated or selected preference.

Central bankers have Rigged the Capital Markets

Of course, I keep emphasizing that the interim gyrations will depend on external developments, particularly from the US.

Even as the current domestic environment operates on bubble policies, the extent of misallocations of capital has not yet reached cataclysmic bubble proportions.

We are more prone to the risks of contagion.

Except for a few standouts, most of the major markets traded lower this week.

Except for blazing hot Thailand, for the rest of the ASEAN giants, the Phisix (PCOMP-red) along with Indonesian (JCI green) and Malaysian (FBMKLCI orange) bellwethers also seem to be topping out.

That should be natural considering the he unfolding developments in China which for me remains as a big concern.

The ballooning number of unsold goods[5], hot money outflows and worsening manufacturing activities[6] among many other economic indicators seem to be worsening and exhibiting signs of a “hard landing”.

A China hard landing or a recession which will likely involve a debt or financial crisis, which will most likely affect commodity exporters and the Asian supply chain network.

Moreover, the slew of negative economic developments has also been manifested in Friday’s breakdown of the Shanghai Index. This should be taken seriously.

China’s major bellwether has so far been in a slow motion decline. Where fear is the most powerful of human emotion[7], slomo can transform into panic in snap of a finger.

For the US and Europe, markets remained transfixed on the central bank actions with special attention over this weekend’s Jackson Hole meeting[8].

Friday’s substantial rally in US stock markets which mitigated the week’s losses, the first loss in 6 weeks, shows of deepening expectations of central banking rescue. From a Bloomberg article[9]:

U.S. stocks rose, paring the first weekly decline in almost two months for the Standard & Poor’s 500 Index, as Federal Reserve Chairman Ben S. Bernanke said he saw “scope for further action,” increasing speculation the central bank will act to boost economic growth.

Again this has been no different in Europe, where financial markets seem to seek for an escape mechanism for their real world problems with the narcotic effects from central bank policies. From another Bloomberg article[10]:

European stocks were little changed, with the Stoxx Europe 600 Index posting its first weekly drop since June, as German Chancellor Angela Merkel said Greece must stick to its commitments to stay in the euro area, and a news report said the European Central Bank is considering setting yield band targets.

Stock markets have been transformed into a game of anticipation on the prospective actions of central banks. It’s a game tilted towards politically connected insiders where the central bankers have effectively rigged the capital markets.

Audit the Fed and President Obama’s Re-election

US equities, for me, seem to have greater downside risk, considering developments abroad prompted for by dilly dallying central bankers and of seeming interminable political wrangling. That’s my bias based on my past analysis[11] [12].

However, given the effective politicization of financial markets, it would be a mistake to discount that US stocks may be manipulated to advance President Obama’s re-election goals[13].

The performance of the stock market have been said to have some influence on or connections to the outcome of US Presidential elections.

According to FoxNews[14],

Of the 28 presidential elections since 1900, an improvement in the S&P 500 prior to an election preceded an incumbent victory 80% of the time, or 16 of 20 of times. The S&P 500’s direction during that period carried an accuracy rate of 82%, according to S&P Capital IQ data.

“Either we have a tremendous situation of being fooled by randomness or we have an interesting stock market phenomenon,” said Sam Stovall, chief equity strategist at S&P Capital IQ.

Of the three out of the four times the incumbent lost following an S&P 500 upswing, outside factors such as third-party candidates were involved, like when Teddy Roosevelt created his own conservative political party ahead of the 1912 election, taking away votes from incumbent William Howard Taft and ultimately leading to the election of Democrat Woodrow Wilson.

When the market fell ahead of a presidential election, the incumbent was overthrown 88% of the time. The only time this predictor failed was in 1956, when Adalai Stevenson failed to overthrow incumbent President Dwight Eisenhower, which could have been a reflection of macro political pressures such as the Suez Canal crisis or Soviet headaches.

This may be coincidence. But advancing stock markets, perhaps, could be interpreted by the public as “progress” even when gains are manipulated or boosted artificially by bank credit expansion.

Besides, policymakers see stock markets as barometer for the animal spirits or market confidence. In the past, US Federal Reserve Chairman Ben Bernanke as an academic professor wrote that

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

This is what I call as the Bernanke dogma. As proof that such dogma has been used as a major tool in today’s policymaking, recently the New York Federal Reserve even boasted of having successfully pushed up US Stock Markets[15].

The Bank of England recently admitted that their Quantitative Easing policies boosted asset prices of mostly the rich[16].

The Bernanke doctrine incorporates not only saving the stock market but of the other financial markets as well, through what he calls as financial accelerator

In a 2007 speech, Chairman Bernanke expounded on what he sees as the importance of keeping financial assets afloat[17]

financial conditions may affect shorter-term economic conditions as well as the longer-term health of the economy. Notably, some evidence supports the view that changes in financial and credit conditions are important in the propagation of the business cycle, a mechanism that has been dubbed the "financial accelerator." Moreover, a fairly large literature has argued that changes in financial conditions may amplify the effects of monetary policy on the economy, the so-called credit channel of monetary-policy transmission

The above underscores the academic justifications of central bank interventions. Also one cannot ignore that policy interventions can be timed to attain political goals.

Also considering that President Obama’s opponent, Mitt Romney, has piggybacked on Ron Paul initiative to have the US Federal Reserve audited[18], which thereby diminishes the political power of Ben Bernanke, we cannot rule out that Mr. Bernanke will use the banking system and the Fed’s monetary tools to ensure Obama’s re-election.

So far, in terms of growth of monetary aggregate, M2 has been on a decline but has now reached at a nominal record high.

The chart of the S&P shows of two contrasting patterns: a bullish rounded bottom (lower green arc) and a seeming double top (two upper green arcs).

So US markets and the economy seem both mixed to neutral for now.

Commodity Rally and the Risk of Stagflation

Current environment has not been about consumer price inflation or deflation. Focusing on these manifests of confused perception of what has been happening.

Instead the current environment has been about deflating bubbles and of the monetary inflation responses from central banks. The articles quoted above are clear manifestations of such dynamics.

Consumer price inflation signifies as one of the symptoms of monetary inflation. Yet bubble cycles can occur with or without excessive consumer price inflations.

As the great dean of the Austrian school of economics, Murray N. Rothbard wrote[19],

if new money is created via bank loans to business, as much of it is, the money inevitably distorts the pattern of productive investments. The fundamental insight of the "Austrian," or Misesian, theory of the business cycle is that monetary inflation via loans to business causes over-investment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real-estate prices are titles to capital goods, there tends as well to be an excessive boom in the stock and real-estate markets. It is not necessary for consumer prices to go up, and therefore to register as price inflation.

The bubble dynamics of Thailand in the 90s demonstrates that booms may not necessarily be accompanied by strong surges in consumer price inflation. When the Asian crisis emerged as exhibited by the collapse of the SET[20], Thailand’s CPI fell close to zero[21]. No CPI inflation or deflation here. But a bubble occurred.

A significant development over the past two weeks has been the resurgence of gold.

The price of gold has made a critical breakout from the one year consolidation phase which came along with significant upside moves from the broader commodity sphere.

The recent rally by gold has been backed by the major bellwether the CRB, the industrial metals ($GYX) and energy ($GJX), as well as, the frontrunning agriculture ($GKX) indices. The latter has been catalysed by the US drought and worsened by the distortions from the policies aimed at the promotion of ethanol and biofuel energy.

As Cumberland Advisor’s Bill Witherell points out[22],

The US is projected to divert about 40% of its corn crop into ethanol, and about 60% of Europe's rapeseed crop goes to the production of biodiesel. Brazilian ethanol production consumes half of their sugarcane crop.

I would suspect that these belated moves by commodities have been prompted by the same expectations that have driven the recent stock market rally.

But instead of the constant toggling from risk ON to risk OFF environment, this may seem more of a rotational process or of the relative impact of monetary inflation to the economy. Oh yes, this seems hardly been about fear….yet.

It is yet unclear if the recent gains by commodities will be sustained. These will heavily depend on the actions of policymakers of the developed world and of China.

A recovery of commodity prices should eventually put a floor on the Philippine mining sector.

We should remember that the commodity bull run over the last decade, has largely been a function of insurance against monetary disorder, asset diversification and a position on emerging market development.

Yet current rally may be more about the insurance aspect as China’s economy seems to be stagnating.

It is also unclear if a sustained recovery in commodities will accompany a RISK ON environment for emerging markets and Philippines.

High commodity prices are likely to influence emerging markets consumer price inflation more. Food makes up a large segment of consumption basket for emerging Asia including the Philippines. This would prompt for their respective central banks to reluctantly tighten. Monetary tightening will put pressure on the stock market.

Stagflation, thus, also represents both a contagion and internal (political and market) risk for the Philippines and for emerging Asia[23].

Yet the divergence in policy rates between emerging markets and developed economies may induce more commodity inflation which eventually could be transmitted to developed economies.

Under this environment, positions on resource companies would be more ideal than to hold cash.

And should a stagflationary environment escalate around the world, do expect more pressures on the debt laden developed nations to default as the cost of interest payments on current liabilities soar. And any inflationist response from central banks, to drive down rates, would likely backfire and even worsen the situation.

I might add that if the US economy faces imminent risks of recession, it is likely that the US Federal Reserve will engage in more balance sheet expansion to bailout by reflating the system, this may fire up consumer inflation.

In the US, signs of consumer price inflation have begun to emerge from a combination of reasons. Peter Luger Steak house[24] expects to increase prices of their products based on higher commodity prices. Papa John’s Pizza will raise prices due to compliance on Obamacare[25], so has Chipotle Mexican Grill Inc., McDonald's Corp. and Buffalo Wild Wings[26]

Maintain a Defensive Posture

For now, do expect the Phisix to playout the normal and ‘healthy’ correction phase unless external events deteriorate more than expected.

There will be interim sporadic rebounds but unless we see improvements on both domestic actions and external conditions, we should remain defensive.

Playing defensive means patient positioning. Current events should extrapolate to a buyer’s market.

In the interim, we need to monitor the conditions in China, as well as, watch over feedback loop between the responses of the G-7 policymakers (as well as China) and of the market’s impact on them.

This only means that events remain highly fluid and susceptible to sharp volatilities.

Also, if the commodity rebound will be sustained, then the beacon of an impending bottom of mining sector should be in the horizon.

---

[1] StockCharts.com Head and Shoulders Top (Reversal) - ChartSchool

[2] See Phisix: Will the Risk ON Environment be Sustainable?, June 24, 2012

[3] Investopedia.com Mean Reversion

[4] See Philippine Mining Index: Will The Divergences Last? August 13, 2012

[5] see China’s Mounting Glut of Unsold Goods, August 24, 2012

[6] see China’s Manufacturing Slump Deepens August 23, 2012

[7] see Why Not to Pay Heed to the Prophets of Ecological Apocalypse August 21, 2012

[8] US Federal Reserve What's Next

[9] Bloomberg.com U.S. Stocks Rise As Fed Sees ‘Scope For Further Action’ August 25, 2012

[10] Bloomberg.com European Stocks Little Changed; Stoxx 600 Falls On Week August 24, 2012

[11] See Phisix: Managing Through Volatile Times August 6, 2012

[12] See Phisix and ASEAN Equities in the Shadow of Contagion Risks July 22, 2012

[13] See Has US Federal Reserve Policies Been Engineered for President Obama’s Re-election?

[14] Foxnews.com Betting on a Romney Win? Check the S&P 500 First August 2, 2012

[15] see Bernanke Doctrine: New York Fed Boasts of Pushing Up the US Stock Markets July 14, 2012

[16] See Bank of England Study: QE Benefited the Elites August 24, 2012

[17] Bernanke Ben The Financial Accelerator and the Credit Channel Federalreserve.gov June 15, 2007

[18] Businessweek Romney Calls for Fed Audit as Party Mulls Platform Plank, August 20, 2012

[19] Rothbard Murray N. Money Inflation And Price Inflation Chapter 77 Making Economic Sense Mises.org

[20] Chartsrus.com Thailand SET

[21] IndexMundi.com Thailand Inflation rate (consumer prices)

[22] Witherell Bill Food Prices and International Equity Markets August 18, 2012 Cumber.com

[23] See Will Soaring Agricultural Commodity Prices Bring about Stagflation to Asia? August 2, 2012

[24] Bloomberg.com Peter Luger Steak Prices May Soar as Drought Culls Herds August 21, 2012

[25] Politico.com Papa John's: 'Obamacare' will raise pizza prices August 7, 2012

[26] MoneyMorning.com Rising U.S. Food Prices are About to Eat Away at Your Savings, July 31, 2012

Quote of the Day: Democracy is a Delusion that the Majority is Master of Itself

participatory democracy became fashionable in the 19th century. The main reason was probably because it is easier to squeeze and bamboozle a citizen than it is a subject. The real genius of modern democracy is that it makes the citizen feel that the government and its workings are somehow the product of his own aspirations. If he wants more money for his retirement, he presumes he can get is — provided only that enough fellow citizens share his desire. If he wants to go to war, that too is up to him and his fellow voters. If he wants to spend more money on space exploration or ban people from saying prayers in bars, the majority — of which he feels he should be part — can do that too.

There is hardly anything he and his fellow lumpenvoters cannot do — just so long as they are of one mind on the subject. That is why you so often hear people say, ‘If we could only get together on this…” They believe solidarity is the key to success. Whatever the majority wants, it gets.

Even kings had bits in their mouths and a hand on the reins. According to the “divine right of kings” doctrine, a king was a servant of God. A king was subject as well as monarch. God himself had given them the post; they could not refuse it. Nor could they refuse to carry out the job on the terms that they believed God had prescribed. God could pull on the reins whenever He wanted.

Often, monarchs were ridden by those who claimed to represent God. In the famous example from the 11th century, Pope Gregory VII got into a dispute with Henry IV, the Holy Roman Emperor. Henry was excommunicated. How much harm Gregory’s excommunication would do him, Henry might not have known. But he didn’t want to find out. He dressed as a penitent and waited three days outside the Pope’s refuge at Canossa. Then he was admitted and forgiven.

The democratic majority, on the other hand, recognizes no authority — temporal, constitutional nor religious — that can stand in its way. And thus it deludes itself to thinking that it is the master of itself, its own government and its own fate.

“The government is all of us,” said Hillary Clinton.

This from Bill Bonner, founder and president of the Agora Publishing, in one of his latest articles published at the Agora’s Daily Reckoning website.

In reality, participatory democracy is the manipulation of the delusional majority to serve the interests of the political minority.

Video: Doug Casey on Speculation and the US Dollar

There are three investors whom I like to emulate, they are Dr. Marc Faber, Jim Rogers and Doug Casey. Their common denominator are that they are staunchly free market advocates and are global citizens.

The two videos below are interviews with Doug Casey which had been recently held in Canada.

10 Tips on Speculation and Life



Some notes of the interview

-The importance of clear definition of terms
-Understand counterparty risks
-Understand and take contrarian position
-Expanding one’s knowledge horizon by investigating beyond the topic interests by reading further. In short take a comprehensive research on areas of interests
-Doug says “I’d rather be lucky than smart”, he also says “make your own luck” (I’d say this resembles Nassim Taleb’s black swan theory)
-Diversify internationally
-He likes Thailand but sees the country as not friendly to immigrants
-Doug says "You don’t want be a resident anywhere", which means we should be responsive to political risks

Why the Dam is Finally Breaking on the US Dollar


Some notes of the interview:
-Doug is a long term bear of Europe largely due to the popular destructive ideas of statism
-Despite the rhetoric, in the political spectrum both the leftist and rightist camp disdain social and economic freedom
-The US international reserve status is crumbling: Dam is breaking
-Blocking or cutting Iran out of the SWIFT system (using the US dollar for its oil trades) only gives the incentive for nations to shift out of the US dollar trade.
-The world will go back to gold.
-Monetary reforms could mean gold will be used as currency for international trading but domestic economies will remain fiat based
-Gold is not an investment, gold is money
-US elections: No discernible difference between two candidates, both are statist
-Major asset of Canada’s central bank is the US dollar, thus, what happens to the US dollar will affect the Canadian dollar. Doug says “The best thing about Canada is that Canada is not the US”
-Doug encourages people anew to be flexible in terms of living. He says that we should not adapt the "medieval peasant attitude" of being a "vegetable" (sticking to a single place), as the “vegetable" outlook is not a good survival strategy
-Doug says he likes to be paid for a high standard of living.
-Doug is ambivalent on commodities over the long term, because longest bearmarket in history is in commodities. This is largely due to the advancement in technology.
-Mining is a risky business. Legal, environmental and industrial costs are as expensive as mining engineers
-Government and environmentalists sees mining as a cow to milk
-Everybody hates mining
-Gold stocks are speculative
-Though bearish long term he endorses buying on gold and silver
-He says that there will be bubbles in different markets around the world (I agree, ASEAN is one)
-Gold might become a bubble
-Mining stocks could also become a bubble
-Doug believes in the cattle (and agricultural) business
-Doug thinks that the over expanded financial industry is bound for a collapse
-Like Jim Rogers, he thinks that farmers will become millionaires while financial executives will become paupers.

Video: The Last 24 Hours of Pompeii (August 24 79 AD)

An animated reenactment of the final hours of Roman town city of Pompeii from the cataclysmic eruption of Mt. Vesuvius in August, 79 AD is shown through video below.

From the Daily Mail (hat tip lewrockwell.com)

The final 24 hours of the Roman city of Pompeii are being relived on Twitter today - exactly 1,933 years after an eruption of Mount Vesuvius buried the city beneath a blanket of ash.

The minute-by-minute reconstruction of the city's destruction is based on the tale of Pliny the Elder, the Roman scholar and admiral who took command of the city's evacuation.

The city's cataclysmic final day will be retweeted as it happened from the Twitter account Elder_Pliny, who has been brought to life by experts from the Denver Museum of Nature and Science.

Located near to modern day Naples in the Italian region of Campania, Pompeii was buried beneath 20ft of ash when Vesuvius erupted in 79AD

The city's destruction was total, and it remained lost for nearly 1700 years before it was rediscovered by archaeologists in 1748.

Since then, it's painstaking excavation has offered historians detailed insights into life in the Roman Empire, frozen at that moment Pompeii was entombed by the volcano's eruption.

The UNESCO World Heritage site has also become one of Italy's most popular tourist attractions, with some 2.5million visitors a year coming to soak up it's unique history.

Video: Celebrity Prank

From WorldTalkLIVE, (hat tip Zero Hedge)

On the night of July 27th, 2012, a huge prank was pulled in New York City and this is the video of what took place. Brett Cohen came up with a crazy idea to fool thousands of pedestrians walking the streets of Times Square into thinking he was a huge celebrity, and it worked! Not only did it work, it caused quite a stir. This social experiment, of sorts, makes a profound statement about how modern culture is so attracted to pop culture, without any real credibility needed.

He dressed up like a typical celebrity and was accompanied by an entourage of two professional bodyguards, two assistants, and photographers pretending to be paparazzi. While the assistants and photographers waited for Brett to exit the 49th street marquee at NBC Studios, they started a buzz that a "big star" was about to walk out, thus making it worth their while to wait and get a picture. Many asked the crew whom Brett was, and no answer was given. They were forced to either make something up, or just take a picture with him in hopes that their Facebook friends or Twitter followers might have a better idea.

As the crew walked over to Times Square, the crowds around Brett grew on each consecutive block. Very few people even questioned who he was, where he was from, or what he does. Brett took pictures with nearly 300 people before the stunt ended. The video even includes interviews with people who had just taken a picture with Brett, and puts them in an awkward position when they're asked questions such as, "Where do you know Brett from?" and "What's your favorite movie he was in?" Many of them were overwhelmingly excited over Brett's walk through Times Square, and it showed.

While the video may have been intended to amuse audiences, there is a subtle message from it: They reveal of the cognitive biases from which the most people fall for, in particular the framing effect (people tend to reach conclusions based on the 'framework within which a situation was presented), the survivorship bias (tendency for people to look at the visible, particularly the winners or the survivors) and rationalization (making excuses).

Beware of the popular, because they are most likely illusions.

China’s Public Works Disasters

Here is another example of the unintended nasty effects from China’s centrally planned capital-infrastructure spending boom

From the International Business Times

A collapsing bridge in northern China killed three people and injured five others on Friday.

The Yangmingtan Bridge stretched across the Songhua River in the Heilongjiang province, according to the BBC. But the collapsed section, which was about 328 feet long, came from a ramp over dry land. It was about 5:30 a.m. when four loaded trucks spilled onto the ground as the road beneath them fell apart.

The worst part is that nobody is surprised by Friday's tragedy; this was China's sixth major bridge collapse since July of 2011.

Note: This incident has been the SIXTH major bridge collapse since July 2011. This appears to be the result of the 2008-2009 stimulus program, which prompted the Chinese government to rush public works for the sake of keeping up with statistical job growth via Keynesian policies.

Other grand “public work” projects have also experienced accidents. Again from the same article…

The Yangmingtan Bridge, a multi-million-dollar project, was finished just nine months ago. It is one of many infrastructure projects undertaken by the Chinese government in recent years. These include over 4,200 miles of high-speed rail tracks, which may increase to 12,000 miles by 2020; the Three Gorges Dam on the Yangtze River, which is the largest hydroelectric project the world has ever seen; and the rapid construction of new airports that, if all goes according to plan, will bring China's total up to 230 by 2015

But for all their successes, each of these grand projects has been marked by serious failures.

China's high-speed trains, for instance, may be going a bit too fast; there have been several accidents over the last few years. In July of 2011, a two-train collision killed 40 people. In March of this year, a 980-foot stretch of track along the Yangtze River collapsed due to nothing more than heavy rains. And in the Heilongjiang Province on Thursday evening, a minor crash injured 24 people.

The Three Gorges Dam has plenty of issues too, though it generates enough watts to power Switzerland. It has necessitated the relocation of over a million people, and its construction has come at a huge environmental cost. Lately, a change in the reservoir's water level has resulted in dangerous landslides, and Reuters reported this week that another 100,000 people will soon have to head for higher ground.

Man made disasters and accidents account for some of the unintended consequences.

But there is more, many upcoming projects risk underutilization or becoming white elephants…

And if all goes to plan, China's planned airport development will put a full 80 percent of the population within 65 miles of an air transport hub. Some argue that this might be a little excessive for a country where, just last year, two-thirds of China's current 180 airports were unprofitable. (Chinese officials argue that air travel is a burgeoning industry, and that an extensive network of transit hubs will generate the traffic needed to make it profitable.)

Japan’s bubble bust legacy of “socialization of investments” from numerous money losing taxpayer funded public airports should be an example.

Assuming the noble intentions of political authorities, central planning implies omniscience and the superiority of knowledge over the marketplace which simply isn’t true. Political authorities cannot know of the individual preferences and values and of the particular circumstances of time and place with respect to individual actions.

Also this also disregards the notion of the incentives guiding policymakers

Virginia Postrel in her 1998 book, The Future and Its Enemies as quoted by Professor Don Boudreaux,

To centralize knowledge for the sake of planning and “efficiency” – the technocratic dream – we have to throw away vast amounts of local knowledge.

Depending on topsight can easily lull us into imagining that we see not only the “big, big, big, big, big, big, big, big picture” but the whole, including the critical details. At a distance, it is easy to think that other people just don’t know what they’re doing – especially when you can override their decisions by decree rather than through persuasion or competition.

Yet most seem to forget that political authorities tend to itch on spending other people’s money.

Politicization of the allocation of resources leads not only to waste, deaths from accidents and corruption, but to systemic fragility from centralization of policy errors—the hemorrhage of resources and capital on unproductive undertaking (capital consumption), of mounting debts to finance political boondoggles (debt crisis) and of the loss of civil liberty.

Video: Peter Schiff takes on Gold Bear Chartist

The following video shows of the typical differences of how market participants operate.

Peter Schiff here staunchly defends the bullish case of gold based on fundamental long term perspective against a gold (short term) bear chartist. (hat tip: Bob Wenzel)

Charts or trend patterns are usually interpreted based on the underlying bias of the technician.

Moreover, the video wonderfully exhibits the stakeholder's dilemma at work-where the incentives to secure knowledge are driven by the degree of stakeholdings.

Such conspicuous nuances can be seen from the perspective of the institutional "analyst" who lack the meticulousness in her analysis of the gold market (because she don't have exposures on them) and of "equity holders" (as represented by Peter Schiff) who has direct stakeholding on gold.

The contrast of incentives frequently leads to the principal-agent problem or ethical dilemma. It is just in this case, the equity holder has been in command of the situation and is aware of the weakness of the analyst. In usual cases, it is the latter that influences the former.

How Inflationism Undermines the Division of Labor

Technology guru and Forbes columnist Josh Wolfe writes, (bold and italics original)

Chief Investment Officer of Guggenheim Partners Scott Minerd has just noted the Faustian bargain the Fed has made with quantitative easing (a term itself in its complexity quickly confuses the masses). He notes simple bond math that shows the real risk to the Fed’s actions and the the strength of our dollar [paraphrased here]:

In 2008 pre-crisis

• The Fed had $41B in capital and ~$872B in liabilities = debt/equity ratio of 21:1
• The Fed’s had a portfolio with $480B in Treasuries with duration of ~2.5 years. (a useful rule of thumb is that duration of a bond x the change in interest rate = change in value of the bond)
• Thus a 1% rise in interest rates would cause a 2.5% drop in its holdings ~$12B

In 2011 post-crisis

• The Fed’s had portfolio of $2.6 T in liabilities = debt/equity ratio of 51:1 (up from 21:1)
• Duration = ~8 years.
• Thus a 1% rise in interest rates would cause an 8% drop in its holdings ~$200B
• That decline would exceed its capital by about $150bn

From here: as Minerd’s clear logic lays out: if the economy expands, then interest rates rise, then the Fed’s holdings drop, then it might not have enough sellable assets to reduce the money supply and maintain the value of the US dollar. And then if there are doubts about the dollar, the Fed is the buyer (and printer) of last resort, setting the stage for the risk of runaway inflation. So: “To hedge against [a decline] in the dollar’s purchasing power, investors [are migrating to] gold, commercial property, and artwork.”

While these may prove to preserve capital for the individual, for society it may be far better to have these assets invested in productive profit-seeking business and financing innovation and emerging technologies, than sitting in vaults, piling up on dirt or hanging on walls.

Inflationism drives economic imbalances through the pricing system by disrupting the feedback mechanism (profit and loss to reflect on demand and supply), in conjunction with the coordination process of the allocation of resources (through the production system).

As Professor Gary North explains,

Without reliable, predictable pricing, most people would make errors most of the time in estimating what things should cost. This is as true of our decisions as producers as consumers.

Money allows us to make bids in the market for the ownership or use of scarce resources. These bids are our responses as both consumers of goods and suppliers of goods. If prices no longer convey predictable information over time, planning becomes chaotic. Producers and consumers will erroneously forecast the state of supply and demand. Our errors add up over time. We produce losses. We find that we have consumed our capital. We cannot replace what we have consumed at prices we thought would prevail.

Hedging on assets against inflation keeps capital away from productive undertaking.

More the inflationism means greater volatility, instability and most importantly reduced economic activities. Inflationism also rewards political class and their cronies at the expense of society.

Quote of the Day: Self Respect over Reputation

The optimal solution to being independent and upright while remaining a social animal is: to seek first your own self-respect and, secondarily and conditionally, that of others, provided your external image does not conflict with your own self-respect. Most people get it backwards and seek the admiration of the collective and something called "a good reputation" at the expense of self-worth for, alas, the two are in frequent conflict under modernity. Most people resolbe the tension by cherry picking ethical rules, fitting ethics to their actions.

Indeed. This stirring quote is from author and iconoclast Nassim Taleb at Facebook (link here and here).

Bank of England Study: QE Benefited the Elites

The Bank of England study on The Distributional Effects of Asset Purchases notes of the implications of Quantitative Easing (QE) on Savers

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Inflation is political. Inflation redistributes wealth from society to politically favored groups or the political elites, and thus, promotes wealth inequality.

In this case, inflation through QE has been aimed at supporting asset prices, which essentially accounts for the Bernanke doctrine.

The morality of inflation as the great Henry Hazlitt wrote, (The Inflation Crisis and How to Solve it p.41)

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals

Video: When I Grow Up, I Want To Be A Crony

Professor Mark Perry at the Carpe Diem quotes the Crony Chronicles,

After all, why be a taxpayer, when you could be a tax spender?

Philippine Informal Gold Mining Industry Booms

More evidence that the Philippine informal gold mining sector has been flourishing at the expense of the government.

From Reuters (bold emphasis mine)

Up to 90 percent of small-scale Philippine gold production is being smuggled out of the Southeast Asian country, according to estimates from officials and traders, much of it to China.

The potential revenue being lost is considerable: The Philippines, the world's 18th largest gold miner, produced just over 1 million troy ounces of gold in 2011, worth $1.6 billion at current prices. About 56 percent of that came from small-scale miners, data from the Bureau of Mines showed.

Recent tax increases leads to unintended consequences, as small scale mining activities go underground…

More from the same article

A top central bank official told Reuters new taxes on gold sales imposed last year appear to be a key factor in the alarming rise in gold smuggling. But the head of the revenue agency said in an interview the 7 percent tax on gold sales will not be rolled back and suggested better policing of the borders instead.

The Customs Department, however, told Reuters the problem has become so overwhelming it can do little about the smuggling of gold and other minerals out of the archipelago of more than 7,100 islands.

"All the production of small-scale mines, almost all, now goes to the black market, because there is no tax in the black market," said Rex Banggawan, an accountant for a small-scale mining cooperative that buys and sells gold in the mountain city of Baguio in northern Philippines. "After that, smuggling is automatic."…

The amount of gold sold by small-scale miners and traders to the Philippine central bank in the second quarter plunged 98 percent from a year earlier, according to the latest government data. By law, all gold produced by miners such as Mulato in the Philippines should be sold to the central bank at around world market prices.

It has been an accelerating trend over the past year. The data shows central bank gold purchases dropped an annual 4 percent, 76 percent and 88 percent in the second, third, and fourth quarters of 2011, respectively. It fell 92 percent in the first quarter.

Small-scale gold mining output, is the main source of the central bank's gold reserves, which hit a record high of $10.4 billion early this year.

For authorities, it would be better to “police” than to waive taxes. This assumes that smuggling or the informal sector will be curtailed by mere regulatory enforcement, yet the above already demonstrates their helplessness: note the phrase “become so overwhelming it can do little about the smuggling”

Doing the same things over and over but expecting different results has been the entrenched characteristic of politics. The essence of politics is symbolism. The impression to “do something” are actually meant to generate votes.

In reality, the purported political path to “police” gives political authorities a share in the the profits. Possibly to finance coming elections?

The problem extends beyond gold to other minerals, which are being smuggled out of the porous and inadequately policed borders of the archipelago.

The Philippines has one of Asia's richest trove of minerals with reserves of gold, copper, nickel, chromite, manganese, silver and iron worth a total of around $1 trillion.

Foreign investors are circling around one of Asia's hottest emerging markets. The $225 billion economy grew 6.4 percent in the first quarter, second only to China among Asian economies. But mining investment has been held up for various reasons, including a moratorium on new projects until Congress passes long delayed legislation governing the industry.

That has left the field largely to small-scale miners, who fall under local regulations and are often in collusion with the officials governing them.

More politicization of the industry (not limited to gold) via (partial) prohibition (EO 79), regulations and taxes translates to booming black markets, smuggling, criminality (e.g. organized crime, violence, etc...) and corruption, as well as environmental pollution.

As I recently wrote,

Informal economy, corruption, rent seeking and a general deterioration in the quality of governance are symptoms or are products of asphyxiating regulations, bureaucracy, high burdens from taxes and the cost of compliance, insecure property rights and involuntary exchanges or the intense politicization of the industry.

Nevertheless also do expect more massive illegal and wildcat mining in the 78 areas that has been prohibited from mining which should lead to environmental degradation. The people who will undertake the fly by night mining operations will likely be wards of politicians.

In the realm of politics, natural laws of economics simply vanish or will submit to the will of politicians.

Of course all these also goes to show that the public have been hoodwinked to give the incumbent government high approval ratings, when in reality, what has been providing the pivotal lift to the Philippine economy has been the informal sector.

Said differently, what has been seen as political success has really been government failure. After all, politics is all about smoke and mirrors.

China’s Mounting Glut of Unsold Goods

More signs of China’s hard landing or bursting bubble.

From the New York Times,

After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.

The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.

But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”

This seems an obvious outcome from a politicized economy.

As I previously pointed out:

-Today Chinese economy has been roughly split 50-50 between state owned and privately owned enterprises

-State companies use political means of “higher taxes, stricter regulation, and bureaucratic meddling” to “drive out private competitors”

-State banks discriminate in terms of lending where “only four percent of their loans to private businesses”. Thus, the recourse of private businesses has been through the informal or shadow banking systems. Ironically, transacting with unofficial credit markets “can be a criminal offense punished by long jail terms or worse”

The implication of the above is that much of China’s present day economy remains influenced by political forces. This means we cannot trust statistical figures to show real economic growth as they may likely be manipulated for immediate political goals.

Politicization simply means State Owned Enterprises (SOE) have hardly been driven by the discipline of profit and losses, and instead have been focused on attaining goals as dictated by the officialdom. Thus, to pad up on economic statistics, numerous SOEs engaged in production that has led to the glut of unsold goods.

Since statistics have been used as guide for the implementation of policy objectives, the government’s manipulation of statistics has also added to the misallocation of resources.

Lastly, excess supply of goods are also symptoms of the recessionary phase of China’s business cycle. This has been caused by easy money policies from China’s central bank, designed to attain credit driven permanent state of quasi booms, and has been compounded by capital spending binge by the government.

As the great dean of Austrian school of economics wrote,

The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed.

Surplus goods along with ghost cities and malls and the huge shadow banking system all adds up to exhibit signs of the unwinding phase of China’s bubble economy.

The inflationary boom may have segued into a financial and economic bust.

Infographic: History of Money (1821-2012)

This wonderful infographic from Goldmoney.com (Thanks to Paul Buitink of Goldmoney)

To know more about the history of money check out Murray Rothbard's What has Government Done to our Money

Quote of the Day: Artificially Constructed Countries to Fall Apart

Syria – like almost all of the countries in Africa, the Middle East, and Asia – is an artificial construct put together, completely arbitrarily, by politicians in the boardrooms of Europe. In the case of Syria, it was assembled from some of the remnants of the Ottoman Empire by the Europeans after World War I. As in neighboring Lebanon and Iraq, it's got at least a dozen major religious/tribal/ethnic groups that are loyal mainly to themselves. The idea of a Syrian nation is a fantasy. It was inevitable that eventually Syria would fall apart – just as it was and is inevitable for most of the other artificially constructed countries to fall apart. This applies to the EU now as well, for similar reasons.

This is from investing guru and philosopher Doug Casey on Syria and US foreign policies.

I think such unfolding political dynamic fits the global trend towards decentralization. Yet the transition process will hardly be smooth considering that many entrenched power blocs benefit from the current order and will resist giving up on these privileges. However, change is not only inevitable but imminent.

Video: Political Economy of US Prison Population

The following video from LearnLiberty.org explains of the political economy of the US prison population, which is the largest in the world (thanks to Learn Liberty's Tim Hedberg)

Here is a snippet from Learnliberty.org,

The United States incarcerates more people than any other country in the world—more even than China or Russia. Prof. Daniel J. D'Amico explains that as of 2010 more than 1.6 million people were serving jail sentences in America. Professor D'Amico suggests that "prisons are not what we think about when we think of America, and they shouldn't have to be." According to D'Amico, a free country should not have 1.6 million people in prison, and a fiscally responsible country cannot afford to. As Prof. D'Amico points out, it is time for Americans to recognize that the U.S. criminal justice system is desperately in need of reform

Yet many of those incarcerated have not committed crimes against humanity but have been convicted out of prohibition laws, particularly the war on drugs.

Let me re quote Econolog's Professor David Henderson

We hear a lot about the top 1%. We don't hear a lot about the bottom 1%. There are about 313 million people in America today. 1% of 313 million is 3,130,000. In our prisons today are 2,200,000 people. So the people in prison are 2/3 of one percent. And their wages are typically about 23 cents an hour. They are, essentially, the bottom 1%.

Many of them are there for violent crimes, theft, fraud, and other such things. But hundreds of thousands of them are there for buying, selling, or producing illegal drugs. The drug war has put them there. And we taxpayers are paying $30,000 a year and more to keep them there.

So let me get this straight: high-income people are paying lots of taxes so that the government can put poor people in prison and keep them poor or put non-poor people in prison and make them poor.

Thus prisoners represent the bottom 1% largely because of "feel-good" self-righteous politics.

China’s Manufacturing Slump Deepens

From the Wall Street Journal,

The preliminary HSBC China Manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity, fell to a nine-month low of 47.8 in August, compared with a final reading of 49.3 in July, HSBC Holdings PLC said Thursday.

The fall could stoke market concerns over a sharp slowdown in the world's second-largest economy.

A reading below 50 indicates contraction from the previous month, while one above 50 indicates growth.

The preliminary August reading marks the 10th straight month the index has been in contractionary territory, signaling extended difficulty for manufacturers.

The sustained and deepening slump of China’s manufacturing activities appears to chime with the record amount of cash unleashed by China’s central bank the PBoC a few days back in the economy, and of the recent spate of hot money outflows.

The mainstream’s expectations of a benign slowdown or a soft landing seem to be turning into a hard landing (bubble bust)

The above developments has also been reflected on the financial marketplace as China’s main equity bellwether, the Shanghai index, continues to plumb new lows in slomo fashion.

Yet if conditions continue to deteriorate, where fear eventually dominates, slomo can turn into a stampede. And given the interconnectedness of China's economy and markets to the world, any major downside volatility is likely to enhance the transmission of contagion.

Be careful out there.

Has US Federal Reserve Policies Been Engineered for President Obama’s Re-election?

I have been arguing that Fed policies have been designed for the re-election of Barack Obama.

More clues from LVMI President Douglas French at the Laissez Faire Books,

In their paper “Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results,” researchers at the Socionomic Institute studied the results of every presidential election, since 1792. According to the paper, stock market performance is the best predictor of election results: better than unemployment, GDP or inflation.

It turns out, the higher the DJIA, the better the chance of re-election. Voters give incumbents a pass for their first year in office, figuring it was, in this case, George W. Bush’s fault. So the Dow 30 stood at 9,712.73 on Oct. 30, 2009, when Obama started his second year. That’s the point of no return. It will take a 25% market meltdown, from over 13,000 on the Dow to below 9,712, for Ann Romney to start thinking about rearranging the furniture at 1600 Pennsylvania Ave.: That is if the social mood folks have it right.

So while the Fed’s money policy hasn’t produced more jobs (and won’t), the ground-hugging interest rates have levitated the securities markets and may just get Obama elected to four more years.

Job One in Washington is to be re-elected. How Lord Keynes’ methods get it done doesn’t matter.

This only goes to show how inflationary policies benefits the political class and their allies.

The Enemy from Within: Afghan Forces Turning Against Their U.S. Trainers

Wars spawn their own monsters.

Aside from growing numbers of suicides within the US Army, in the Afghan war, Afghan forces have reportedly been turning against their US benefactors.

Writes the pro-war conservative Heritage Foundation,

American troops in Afghanistan face an increased threat from “insider” attacks in which the Afghan forces they are there to help and train are turning their guns on their American partners, raising serious questions about the viability of the U.S. mission in Afghanistan.

The attacks, which have killed 40 U.S. and NATO troops so far this year, are also referred to as “green-on-blue attacks,” because the military refers to local forces as “green” and allied forces as “blue.”*

Who are the Afghan security forces? While the Afghan Army leaders are professional and committed to working with their American counterparts, the recruits are mostly rural, illiterate men who can become disgruntled by cultural differences with their American trainers or susceptible to insurgent bribes or intimidation. U.S. military officials attribute only about 10 percent of the insider attacks to Taliban infiltration, despite Taliban claims of responsibility for most of the attacks.

There are about 350,000 Afghan security forces, including the police and army. As of October 1, there will be 68,000 U.S. troops in Afghanistan. The U.S. strategy in Afghanistan is centered on being able to train the Afghan forces so they can eventually face down the insurgent threat on their own. If the number of insider attacks does not abate, it will be increasingly difficult to justify a large-scale U.S. troop presence in the nation.

The backlash from US Imperial policies has been intensifying.

As a side note, here is an interesting social media video of US troops in Afghanistan doing a “call me maybe”. (hat tip from cbsnews.com)

Well this is just one of the explosive “call me maybe” videos, you can see more here.

Ironically, the New York Times decries such viral effects of social media as “the music industry itself, has been upended by social media”. This logic has it backwards, the Carly Rae Jepsen “call me maybe” phenomenon became a "viral" hit because of social media. I wouldn’t be listening to her music if not for these amazing videos. [My daughter and her classmates even made one]

Infographic: Scientific Evidence for Popular Health Supplements

Visual.ly has an interesting infographic on the supposed variable tangible benefits of popular health supplements.

[Note I am posting this to share the interesting perspective and should not be reckoned or interpreted as an endorsement].

Learn about infographic design.

Dr Jekyll and Mr Hyde: China and Vietnam to Expand Trade Via Road Network

More signs of China’s love-hate relationship with ASEAN.

Vietnam one of the claimants in the territorial dispute in the South China Sea has forged a “historic” agreement with China to expand trade through a major road network

From ADB, (bold added)

For the first time, buses and trucks will be able to cross overland between the rugged southern regions of the People’s Republic of China (PRC) and the remote northern regions of Viet Nam using a 1,300 kilometer route spanning from Ha Noi to Shenzhen made possible through a road transport agreement between the two countries.

“The new transport agreement will have a profound impact not only on bilateral trade and tourism, but also on Greater Mekong Subregion (GMS) transport facilitation," said Yushu Feng, Principal Economist, Regional Cooperation, at the Asian Development Bank (ADB), which facilitated the bilateral road transport agreement in line with GMS transport facilitation initiatives. “This is a key milestone for regional cooperation.”

The new agreement will ease restrictions on trucks and buses travelling between major economic zones in PRC’s Yunnan province, Guangxi Zhuang autonomous region, Guangdong province and six provinces in Viet Nam, including Lang Son and Quang Ninh provinces, and the cities of Ha Noi and Hai Phong.

Previously, transport operators were only allowed to travel up to 20 kilometers into each other’s territories. Starting August 2012, each country will be able to issue up to 15,100 permits for trucks and buses that travel within the border province area, and each will be able to issue up to 500 permits for trucks and buses than can go to inland provincial areas.

Another significant route, connecting Kunming to Ha Noi and Hai Phong and governed by the same agreement, was inaugurated in Kunming on 16 August 2012.

In 2011, road transport volume between PRC and Viet Nam through the Yuyi-Friendship border gate was as much as 1 million tons for goods and around 726,000 passengers traveled overland between both countries. Transport volume is expected to increase with the newly-implemented road transport agreement. To accommodate market demand, the permit quota for 2013 will be increased, accordingly.

The controversial disputes make it to the headlines and thus fire up emotions that arouse aggression via obtuse (feel good) nationalism.

But these trade agreements which signifies “key milestone for regional cooperation” will be relegated to the business or back pages.Yes the growing trade volume between ASEAN-China are for real.

Overall, China’s seeming antagonistic foreign policies or the gunboat diplomacy has hardly been consistent with her economic policies.

This makes me suspect that one of the two contradicting policies signify as no more than false signals (if not a false flag) aimed at the promotion of concealed political goals.

Global Warming in the Perspective of Social Science

Politics has mainly been about arousing emotions. In the debate over global warming, arguments have essentially been reduced to either black and white, or either “you are for are against us” (False choice).

Never mind if previous predictions has always failed due to misdiagnosis arising from blind spot-illusory superiority cognitive biases or the overestimation of one's assumptions (knowledge problem).

Professor Steve Horwitz puts the global warming-climate change issue into perspective with 8 highly relevant questions (from thefreemanonline.org) [Italics bold original]

1. Is the planet getting warmer?

2. If it’s getting warmer, is that warming caused by humans? Obviously this is a big question because if warming is not human-caused, then it’s not clear how much we can do to reduce it. What we might do about the consequences, however, remains an open question.

3. If it’s getting warmer, by what magnitude? If the magnitude is large, then there’s one set of implications. But if it’s small, then, as we’ll see, it might not be worth responding to. This is a good example of a scientific question with large implications for policy.

Matters of Science

All these questions are presumably matters of science. In principle we ought to be able to answer them using the tools of science, even if they are complex issues that involve competing interpretations and methods. Let’s assume the planet is in fact warming and that humans are the reason.

4. What are the costs of global warming? This question is frequently asked and answered.

5. What are the benefits of global warming? This question needs to be asked as well, as global warming might bring currently arctic areas into a more temperate climate that would enable them to become sources of food. Plus, a warmer planet might decrease the demand for fossil fuels for heating homes and businesses in those formerly colder places.

6. Do the benefits outweigh the costs or do the costs outweigh the benefits? This is also not frequently asked. Obviously, if the benefits outweigh the costs, then we shouldn’t be worrying about global warming. Two other points are worth considering. First, the benefits and costs are not questions of scientific fact because how we do the accounting depends on all kinds of value-laden questions. But that doesn’t mean the cost-benefit comparison isn’t important. Second, this question might depend greatly on the answers to the scientific questions above. In other words: All questions of public policy are ones that require both facts and values to answer. One cannot go directly from science to policy without asking the kinds of questions I’ve raised here.

7. If the costs outweigh the benefits, what sorts of policies are appropriate? There are many too many questions here to deal with in detail, but it should be noted that disagreements over what sorts of policies would best deal with the net costs of global warming are, again, matters of both fact and value, or science and social science.

8. What are the costs of the policies designed to reduce the costs of global warming? This question is not asked nearly enough. Even if we design policies on the blackboard that seem to mitigate the effects of global warming, we have to consider, first, whether those policies are even likely to be passed by politicians as we know them, and second, whether the policies might have associated costs that outweigh their benefits with respect to global warming. So if in our attempt to reduce the effects of global warming we slow economic growth so far as to impoverish more people, or we give powers to governments that are likely to be used in ways having little to do with global warming, we have to consider those results in the total costs and benefits of using policy to combat global warming. This is a question of social science that is no less important than the scientific questions I began with.

I could add more, but this is sufficient to make my key points.

Professor Horwitz’s striking conclusions:

First, it is perfectly possible to accept the science of global warming but reject the policies most often put forward to combat it. One can think humans are causing the planet to warm but logically and humanely conclude that we should do nothing about it.

Second, people who take that position and back it up with good arguments should not be called “deniers.” They are not denying the science; they are questioning its implications. In fact, those who think they can go directly from science to policy are, as it turns out, engaged in denial – denial of the relevance of social science.

Global warming-climate change is as much about economics or social sciences than just an issue of environmental science. Don’t be misled.

Why Not to Pay Heed to the Prophets of Ecological Apocalypse

Emotions based issues sell because people are emotional animals. Yet among all the emotions it is fear which is most powerful. That’s why horror movies sell, stock market crashes occur [where fear is a symptom and an accelerator of the market process], and that’s why many fall prey easily to "fear" based politics (e.g. climate change, peak resources and etc…).

Doomsayers sell or are popular also because of many people’s attachment to the Pessimism bias or the bias which exaggerates the likelihood of a negative outcome.

The profound Matthew Ridley writing at the Wired.com chronicles a list of prediction failures made by prophets of the apocalypse or Armageddon.

Ironically, despite the string of utter prediction failures; fear based issues remain in high demand. These have been evident in four fronts of social affairs, particularly in chemicals, diseases, people and resources. Mr. Ridley calls them the four horsemen of the apocalyptic promises

Here is an excerpt from the article.

Religious zealots hardly have a monopoly on apocalyptic thinking. Consider some of the environmental cataclysms that so many experts promised were inevitable. Best-selling economist Robert Heilbroner in 1974: “The outlook for man, I believe, is painful, difficult, perhaps desperate, and the hope that can be held out for his future prospects seem to be very slim indeed.” Or best-selling ecologist Paul Ehrlich in 1968: “The battle to feed all of humanity is over. In the 1970s ["and 1980s" was added in a later edition] the world will undergo famines—hundreds of millions of people are going to starve to death in spite of any crash programs embarked on now … nothing can prevent a substantial increase in the world death rate.” Or Jimmy Carter in a televised speech in 1977: “We could use up all of the proven reserves of oil in the entire world by the end of the next decade.”

Predictions of global famine and the end of oil in the 1970s proved just as wrong as end-of-the-world forecasts from millennialist priests. Yet there is no sign that experts are becoming more cautious about apocalyptic promises. If anything, the rhetoric has ramped up in recent years. Echoing the Mayan calendar folk, the Bulletin of the Atomic Scientists moved its Doomsday Clock one minute closer to midnight at the start of 2012, commenting: “The global community may be near a point of no return in efforts to prevent catastrophe from changes in Earth’s atmosphere.”

Over the five decades since the success of Rachel Carson’s Silent Spring in 1962 and the four decades since the success of the Club of Rome’s The Limits to Growth in 1972, prophecies of doom on a colossal scale have become routine. Indeed, we seem to crave ever-more-frightening predictions—we are now, in writer Gary Alexander’s word, apocaholic. The past half century has brought us warnings of population explosions, global famines, plagues, water wars, oil exhaustion, mineral shortages, falling sperm counts, thinning ozone, acidifying rain, nuclear winters, Y2K bugs, mad cow epidemics, killer bees, sex-change fish, cell-phone-induced brain-cancer epidemics, and climate catastrophes.

So far all of these specters have turned out to be exaggerated. True, we have encountered obstacles, public-health emergencies, and even mass tragedies. But the promised Armageddons—the thresholds that cannot be uncrossed, the tipping points that cannot be untipped, the existential threats to Life as We Know It—have consistently failed to materialize. To see the full depth of our apocaholism, and to understand why we keep getting it so wrong, we need to consult the past 50 years of history.

The classic apocalypse has four horsemen, and our modern version follows that pattern, with the four riders being chemicals (DDT, CFCs, acid rain), diseases (bird flu, swine flu, SARS, AIDS, Ebola, mad cow disease), people (population, famine), and resources (oil, metals). Let’s visit them each in turn.

Read the rest here

China’s Central Bank Floods System with Record Cash

China’s central bank flushes her financial system with record cash

From Businessweek/Bloomberg,

China’s interest-rate swaps fell from a three-month high as the central bank injected record funds into the financial system to ease a cash crunch.

The six-month contract, the fixed cost to receive the seven-day repurchase rate, fell five basis points, or 0.05 percentage point, to 3.25 percent as of 10:27 a.m. in Shanghai, according to data compiled by Bloomberg. It reached 3.31 percent yesterday, the highest since May 11. The seven-day repo rate, a gauge of interbank funding availability, increased 10 basis points to 3.72 percent, a weighted average shows.

The People’s Bank of China conducted 220 billion yuan ($34.6 billion) of reverse-repurchase operations, the most in a single day, according to a trader at a primary dealer required to bid at the auctions. The government may introduce new policies to boost consumers’ borrowing and spending this year, the Economic Information Daily reported today, citing an unidentified person.

“This unusually large volume points to the central bank’s concern about the elevated level of money-market rates,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. “We still expect a reserve-requirement cut, but the impact of this large open- market operation should be lower interest-rate swaps at the short end.”

The central bank last lowered banks’ reserve requirements in May and cut benchmark interest rates in June and July to support the economy. Gross domestic product increased 7.6 percent from a year earlier in the second quarter, the least since the first quarter of 2009, official figures show. Economic growth will slow to a 13-year low of 8.2 percent in 2012, based on the median estimate in a Bloomberg survey.

By the way the PBOC acted, China’s economy has been suffering more than just a slowdown. Yet this, perhaps, may be a precursor to bigger interventions.

The Shanghai index closed modestly higher today. Gold prices has so far responded positively.

Quote of the Day: Neoconservatism Represents Big Government

Neoconservatism is not the philosophy of free markets and a wise foreign policy. Instead, it represents big-government welfare at home and a program of using our military might to spread their version of American values throughout the world. Since neoconservatives dominate the way the U.S. government now operates, it behooves us all to understand their beliefs and goals.

This is from congressman Ron Paul on Neo-conservatism